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Energy Sources: Slippery times - Views on News from Equitymaster
 
 
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  • Jul 13, 2002

    Energy Sources: Slippery times

    On liberalization of the economy, like in most industries, foreign multinationals, attracted by the emerging market characteristics, made a beeline for the Indian lubricants industry. Experiencing saturation in home markets, it seems, any growth story was worth testing. Besides a few, most MNCs are unlikely to have had a memorable experience.

    The lubricants industry was deregulated in FY03 with the Government transferring base oil imports, the key raw material, to the open general list (OGL). Also, private producers were permitted to market their products through a parallel distribution channel or in industry terminology the 'bazaar segment'. While per capita numbers indicated growth potential, in reality the lube market stagnated in volume terms at an estimated 1 m metric tonnes (MMT). However, in value terms the sector registered growth of 5.8% YoY since FY93 from an estimated Rs 35 bn to Rs 55 bn.

    The industry size in value terms increased, as manufacturers successfully shifted promotion and packaging in marketing of lubricants from commodity to consumer products. Thereby, increasing value in the eyes of the consumer. Also, the introduction of specialized lubes led to higher priced products in the market place. An important transformation during this period was the change in lube purchase pattern in favour of 'bazaar' segment. Since decontrol, share of 'bazaar' segment in lube sales has reportedly increased to 73%, as petrol pumps lost their domination in lube retailing. This change in buying behaviour is likely to have fuelled growth for the private players.

    That said, over the past two years, the industry, especially private sector companies, have come under pressure, as volumes contracted, competition eroded prices and consumer behaviour trends seem to have saturated. Lubricants business contracted with industry volumes declining by an estimated 10% to 900,000 tonnes over the concerned period. Competition remains stiff with industry remaining fragmented. Currently, as per reports, there are 30 large players in the market with 5,000 small blenders. Top industry players include HPCL, BPCL, IOC, Castrol, Elf, Shell, Pennzoil, Tide, Caltex, Gulf Oil and Fuchs, all fighting for a share of the pie.

    Further, competition has intensified with oil PSUs becoming more marketing savvy and launching products at lower price points, which pulled down industry realizations and margins. Also, from 1996 onwards this segment of producers was permitted to target the 'bazaar' segment -- till then the sole franchise of private players. And when it rains it pours, over FY01 and FY02, soaring oil led to rising feedstock -- base oil -- prices, which cut into margins. Consequently, the industry has seen some re-structuring. Tata BP was amalgamated with Castrol India. Gulf Oil India was amalgamated with Hinduja group company, IDL Industries. Tide Water Oil Company, subsidiary of Andrew Yule & Company, is on the disinvestment list and Indian Oil Corp. (IOC) has exited from a JV, Indo Mobil, with Mobil U.S.

    Besides a downturn in the auto and capital goods industry, much of the decline in volumes mentioned above, we reckon, was due to lengthening in refill times. With improvement in automobile engine quality and lube manufacturers introducing higher resistant products replacement sales is likely to have been adversely affected. As per some estimates, refill time has almost doubled, which suggests that new vehicle lube demand would have to double to maintain existing volumes. We reckon, the above-mentioned trends in the auto and lubes industry are likely to continue, which could keep pressure on volumes. Also, improving road infrastructure could reduce use of lubricants, as fuel efficiency improves and breakdowns decline.

    Giving credit to the enterprise of private sector, identification of the decision maker in the purchase process is likely to have facilitated reversal in buying patterns. The 'bazaar' segment consists primarily of garages, service stations and auto spare part shops and controlling the outcome, in case of the former two, is difficult. Therefore, lube manufacturers focused on the concerned sections to influence the purchase decision. But incremental penetration of 'bazaar' sales is likely to prove challenging. Also, purchases are not impulsive but dependent on vehicle-maintenance patterns. Therefore, while efforts are made to sell lubricants as consumer products, the characteristics maybe different. Consequently, to ensure stickiness of sales, manufacturers have started to tie-up with automobile companies, as consumers are likely to use recommended lubes.

    That said, the deregulation in petroleum marketing could offer much-awaited growth opportunities, as lube manufacturers could gain access to fuel retailing outlets. But this is likely to materialise over the medium term. With emission norms, globally, getting tighter the consumption and price of lubricants could increase. But till then, there is not much to cheer.

     

     

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